What's Better for You, Whole or Term Life Insurance?

(The best time to start planning for the end is now)
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Even though life insurance is meant for after you're gone, it's something you need to start planning for long before the end. But do you know the difference between whole and term life insurance, and which one is best for you? It's okay if you don't. That's why you're here, and that's what an independent insurance agent is for. 

Insurance agents advocate for you and your properties and can help you keep risks, like knowing if you'll have enough money to make it to your death, in mind. They'll help you find the right protection long before you need it. Ask agents anything. They have the answers. 

What Is Whole Life?

Just like it sounds, whole life insurance is an insurance policy that covers you for your whole life. While you're alive it works like a savings account where you can accrue money. You can even borrow against your whole life insurance policy if you need extra cash. Once you die, it pays death benefits to your beneficiary to help pay for any of the costs associated with your death.

Whole life insurance is often referred to as permanent life insurance, and it comes with several benefits, including:

  • Cash value accumulation: Any cash that you build in the savings account portion of your policy is tax deferred and guaranteed.
  • Guaranteed death benefit: When you select this policy, you pick a death benefit amount in the beginning, and that amount is guaranteed.
  • Guaranteed insurance premium: Your monthly or annual premium is guaranteed to remain the same during the entirety of your policy.
  • Guaranteed interest rate: The interest you earn on your cash value accumulation is guaranteed throughout the life of your policy.

Even though the premium of your whole life insurance policy is fixed, you still want to lock in your policy at a young age. This will ensure that your premiums stay low and provide ample time to use the policy as a savings account. It's important to note that any cash value left in your account when you die will be absorbed by the insurance company. Your beneficiary will only be paid the agreed upon death benefit amount. Some policies will offer the ability to purchase a "rider" that gives your beneficiary the cash value and face value of the policy.

An independent insurance agent can help you understand the inner workings of a whole life insurance policy and how to use it to your and your family's benefit. 

What Is Term Life Insurance?

Opposite of a whole life insurance policy, term life insurance is a policy that is set for a specific time period, usually ten, twenty, or thirty years. Term life insurance policies do not offer the ability to double as a savings account. However, your monthly or annual premiums will be fixed for the entire length of your policy and have some additional benefits.

  • Less expensive:  Traditionally, a term life insurance policy is less expensive than a whole life policy.
  • Good for young families: The low cost of a term life insurance makes it a more affordable option for young families who may not be able to afford a permanent policy.
  • More options: Term life insurance allows you to be more flexible with the length of terms of your policy. 
  • Build a policy that works for you: You can combine different terms of life insurance and combine it with other types of permanent insurance to create a policy that fits your needs.

What’s Better for Me, Whole or Term Life?

Discovering which type of life insurance is best for you is the perfect discussion to have with your independent insurance agent. But to help you get the conversation started, there are a few things to keep in mind with each type of policy and who might be a good fit.

You might be a good fit for a whole life insurance policy if:

  • You're looking for a life insurance policy and a savings plan
  • You want to protect your family members from a loss of income if you die unexpectedly
  • You're young and just starting out in life
  • You want to pay off a mortgage, debts, loans, or save for future debts like college tuition
  • You want to make sure you can pay for death and funeral costs of a loved one
  • You're looking to create an estate or a trust

You might be a good fit for a term life insurance policy if:

  • You're looking for short term coverage such as one to ten years
  • You're on a limited budget in regards to what you can afford in your premium
  • You want to be able to control the length of your policy
  • You want your premium to remain the same throughout your policy
  • You're good at investing and saving your money

Can I Invest in Stocks Instead of a Life Insurance Policy?

Sure, you can, but it's a much riskier investment. The stock market has a much higher return on investment than a permanent life insurance policy, but there's no guarantee of where the stock market will be when you die. 

If you're young with potential years to spare, you can purchase a short term life insurance policy and invest in the stock market. When your policy is up for renewal, you'll have the option to switch to a permanent policy, renew a new term policy, or cancel. At this time you can re-evaluate your finances and future needs to determine the best investment route for you.


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What About Mutual Funds? What's So Great About Them? 

Mutual funds are some of the most dependable investment opportunities available. When you purchase a mutual fund, you're actually purchasing a stake in a mutual fund company. The company then uses a fund manager to invest the pool of investors' money to align with the fund's investment objective. 

When deciding between a mutual fund or a life insurance policy, it's best to think of them as partners instead of competition, as in you should do both. Mutual funds are a great way to save money for long-term goals like your child's college tuition or paying off a home. A mutual fund will allow you to diversity your funds in order to save more money than what might be possible with a fixed permanent life insurance fund. 

What Other Important Retirement Investments Are Worth Thinking About?

Many people face the same fear of "will I have enough money to make it to the end of my life," and this is a legitimate fear to have. You can never be overprepared for the end of your life. Fortunately, there are a variety of opportunities to invest in your future and assure you have sufficient funding in your retirement. Some additional investment options that we haven't discussed yet include:

  • Annuities: Sometimes an independent insurance agent is licensed to sell you an annuity. Annuities are designed to assure that you have a steady stream of income during retirement.  With an annuity, you enter a contract with an insurance company in which you agree to make a lump-sum payment or a series of payments in return for regular disbursements of cash in the future.
  • Bonds: A bond is a fancy version of an IOU. Buying a bond means you're loaning money to the person or entity you're giving your money to for a certain amount of time. In return, you'll earn interest on your loan and get paid back the loan in full at a future date. This is known as the bond's maturity date. Bonds are great for generating income and are less likely to lose income than stocks. 

Having a diverse investment portfolio can provide added security during retirement. An independent insurance agent is well versed in saving for retirement, beyond insurance policies. Don't be afraid to work with your agent to build the best retirement plan for you.

Should I Annuitize My Life Insurance?

Chances are you've heard of life insurance annuities or annuitizing your life insurance. When you annuitize your life insurance, your beneficiary chooses to receive their payout monthly, yearly, or in small amounts as opposed to one lump sum after your death. So as you can tell, this actually has nothing to do with you because you'll no longer be around. However, for your beneficiary, annuitizing the life insurance benefit you leave behind could be beneficial for a number of reasons.

  • They can’t be touched in a lawsuit: If you're dealing with settling an estate that might get ugly, it's nice to know that your annuity is safe. 
  • They can be transferred: You can move your annuity from person to person without tax penalties.
  • They can be fixed or variable: Fixed annuities pull from an amount of money that’s decided upon before your death and not touched. Variable annuities are invested, meaning monthly payments could grow (or, unfortunately, shrink) over time. 

Annuitizing your life insurance is a great way to help pay for your children's college if you pass away unexpectedly and ahead of schedule. It can also provide children with monthly payments until they're old enough to support themselves. If you think you want to annuitize your life insurance, you and your beneficiary will want to speak to your independent insurance agent about this option.

Here’s How an Independent Insurance Agent Would Help

As you can see, preparing for the end can be overwhelming with lots of options and different savings avenues. An Independent insurance agent's job is to simplify the process. They search through multiple carriers to find providers who specialize in this type of insurance, deliver quotes from a number of different sources, and help you walk through them all to find the best blend of coverage and cost.

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TrustedChoice.com Article | Reviewed by Paul Martin

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